Canada: What You Need To Know About American State Tax Nexus

It's no secret that since the financial market meltdown of
2008, state governments have been looking to increase revenues by
stepping up efforts to find non-compliant domestic and foreign
taxpayers through state tax nexus requirements. If a company is
deemed to have nexus in a given state, it is required to file tax
returns and pay taxes in that state.

The problem: most of these taxpayers are not aware of
this. This is particularly true for trucking companies that drive
through several states to pick up and drop off their shipments.
Here's what you need to know about state nexus and what you can
do to be compliant to avoid paying costly penalties and even being
denied entry into a state.

What is Nexus?
Loosely defined; nexus is a connection. From a state-tax
perspective, nexus refers to the type and frequency of connections
an out-of-state company has in a state. Every state has different
rules and requirements as to what creates a connection within the
state. Some states are more aggressive than others and could
involve something as simple as having their listing in a local
telephone book or having a business meeting in that state.

For Canadian trucking companies, simply driving through a state
to get to a final destination may create state nexus. If you've
been filing fuel tax reports, then you're already on the radar
of what have come to be known as "nexus squads."

Revenue Miles
When it comes to trucking companies, most states are looking not at
where sales are made but rather revenue miles, or where their miles
are driven in order to create revenue. For example, if you drive
through New York to deliver a shipment to Virginia, a portion of
that revenue will be allocated to New York based on the number of
miles driven through New York to make that delivery. Again, whether
or not your revenue miles are considered depends on the state. For
example, most states provide a "minimum highway use"
threshold that must be met before nexus is established and
two-thirds of states deem nexus is created by trucks passing
through on a "regular basis," however, most states do not
define "regular basis."

How Do I Determine My Nexus?
The Multi State Tax Commission (MTC), which is the state tax agency
that administers tax laws applicable to multistate businesses,
provides guidelines regarding the minimum level of activity that
would create state nexus:

Owning or renting any real or personal property in the
state;

Making any pickups or deliveries within the state;

Traveling more than 25,000 miles per year in the state,
provided the miles do not exceed three percent of the total miles
driven;

Having more than 12 trips per year into the specific
state.

Using your fuel tax reports, you can use the above guidelines to
determine which states you might have nexus in.

What You Risk by Not Being in Compliance
Failure to file state tax returns can result in delay of goods,
seizure of cargo and equipment, and penalties and interest based on
the balance owing, which can also vary from state to state. In a
few states, when nexus is established, it may create Use Tax
obligations for the use of trucks making deliveries in the
state.

Bottom line: You should understand the nexus
requirements in each of the states you travel through and do
business in, so that you can avoid the consequences of
non-compliance. For companies that may have unknowingly had state
tax exposure in the past, there may be amnesty programs that may
alleviate charges and interest. Speak with a tax advisor about what
the next step should be for your company.

Ever since the release of the July 18, 2017 private corporation tax proposals by the Canadian government, our firm has been very active in studying the proposals and informing the public of the consequences...

On July 18, 2017 (the "Consultation Date"), the Minister of Finance (Canada), the Honourable William Morneau, released the Government's proposals to address tax planning commonly used by private corporations...

This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).

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